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The Savvy Way To Trade The index’s Rebound

By Jani ZiedinsStock MarketsMay 14, 2021 02:38AM ET
The Savvy Way To Trade The index’s Rebound
By Jani Ziedins   |  May 14, 2021 02:38AM ET
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Q: What’s the best way to make money in the market?

A: Buy when other people are scared.

Following three dreadful days of selling, the S&P 500 was poised for a bounce.

S&P 500 Index - Daily Chart
S&P 500 Index - Daily Chart

While this rebound provided much-needed relief, the question on everyone’s mind is if this was the real bounce or just another false alarm on our way lower.

Was Thursday’s bounce the real deal? Maybe…but probably not. The problem is we won’t know until after it is over and by then it will be too late to trade it. That means to make money, we have to act with imperfect information.

What is the best way to approach these situations? Well, for nimble traders this is easy, treat every bounce as if it is the real deal. Start small, get in early, keep a nearby stop, and only add to a trade that is working.

If the bottom is already in, great, we bought early and added more as this rebound climbed back to the highs. That means we are already in the perfect position to profit from this bounce. (You were following the rally higher with a trailing stop and moved to cash when this selloff started, right?)

If this is not the real bounce, well, we got in early and placed our stops near Wednesday’s lows or Tuesday’s open. If prices retreat, we get out and try again the next time. No big deal. In fact, a deeper selloff is actually preferred because it gives us even more room to make money buying the next bounce. So here’s to hoping this bounce fails and the discounts get even bigger!

In reality, the third bounce seems to be the most likely to work, but I don’t want to be caught sitting on my hands if this time it’s the first bounce.

Stay nimble and be ready to buy when other people are too scared. If that means we buy one or two dips too early, no big deal. We get out and try again the next time. The important thing is we are in the perfect position to profit from the real rebound.

Elon shocked cryptocurrency investors Wednesday night when he announced Tesla (NASDAQ:TSLA) would no longer accept Bitcoin payments. This was a big blow because TSLA’s buying into Bitcoin was a big component of the rally from $40k to $60k.

Even more concerning than if a bitcoin millionaire can buy his newest electric car using his favorite cryptocurrency is the reason Musk pulled the plug on this bitcoin experiment. It’s because he doesn’t like the amount of energy bitcoin mining uses and its impact on global warming.

This is an often overlooked aspect of cryptocurrencies and Elon shining his billion-watt spotlight on bitcoin’s energy usage could cause long-term ramifications. If this turns into a wider movement, we could see the herd move away from bitcoin and toward a more energy-efficient cryptocurrency. This green shift wouldn’t surprise me in the least.

As I said previously, a prudent trader was to waiting for bitcoin to break above $60k before adding new money. Now that prices have retreated under $50k, this is just another example of why it is often better to be a little late than a lot early.

The Savvy Way To Trade The index’s Rebound

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The Savvy Way To Trade The index’s Rebound

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